Trusts and estates law - knowledge of successor trustee sufficient to commence statute of limitations - O'Connor v. Redstone.

• Author: Seely, Heidi A.

Trusts and Estates Law--Knowledge of Successor Trustee Sufficient to Commence Statute of Limitations--O'Connor v. Redstone, 452 Mass. 537 (2008)

A trustee holds legal title to property for the benefit of another, and consequently has the power to bring actions at law against third parties who harm the trust property. (1) These legal actions are restricted by the statute of limitations applicable to tort or contract matters. (2) The trustee is also personally liable in equity to the beneficiary for any internal breaches of fiduciary duty, such as a breach of the duty of loyalty. (3) equitable actions by beneficiaries against trustees have typically been subject to the doctrine of laches, which requires the beneficiary to bring suit within a reasonable time after gaining actual knowledge of the trustee's breach. (4) In O'Connor v. Redstone, (5) the Supreme Judicial Court of Massachusetts considered whether a successor trustee's knowledge of a predecessor trustee's breach of fiduciary duty is sufficient to begin running the statute of limitations against beneficiaries who have no actual knowledge of such breaches. (6) In a departure from common-law principles pertaining to the separation of legal and equitable claims, the court held that the statute of limitations runs against the beneficiary when the successor trustee knows of the predecessor's breach. (7)

In 1959, Michael Redstone (Mickey) formed National Amusements, Inc. (NAI) and issued three hundred shares of stock: one hundred registered in his own name and one hundred registered in the names of each of his two sons, Sumner Redstone and Edward Redstone. (8) In 1971, a dispute arose among Edward, Sumner, and Mickey over the operation and direction of NAI, resulting in Edward terminating his relationship with the company. (9) upon his separation from NAI, Edward demanded but did not receive the 100 shares registered in his name and hired attorney James DeGiacomo to assist him in settling the dispute. (10)

DeGiacomo negotiated a settlement between Edward and NAI (the 1972 Agreement) wherein Edward agreed to place one-third of the stock registered in his name in trust for the benefit of his children (the Michael Trust and the Ruth Ann trust) and to sell the remaining two-thirds of the shares back to NAI. (11) Ten years later, Sumner, acting as trustee of the Ruth Ann and Michael Trusts, appointed DeGiacomo as independent counsel to determine whether redeeming the NAI shares held by the trusts was in the best interest of the beneficiaries and to determine the fair market value of said shares. (12) After extensive research by DeGiacomo and fierce negotiations between Sumner and DeGiacomo, Sumner agreed to NAI's redemption of the shares for $15 million (the 1984 redemption). (13) Immediately following the 1984 redemption, Sumner resigned as trustee of the Ruth Ann Trust and appointed DeGiacomo as successor trustee of the Ruth Ann trust and co-trustee of the Michael trust. (14)

In 2006, the current trustees of the Michael and Ruth Ann trusts brought suit against Sumner, Edward, and NAI, alleging that Edward had wrongfully converted shares of NAI being held in trust for Ruth Ann and Michael, and that Sumner had breached his fiduciary duty of loyalty by orchestrating the 1984 redemption for his own benefit. (15) The trial court granted summary judgment in favor of the defendants, concluding that the statute of limitations barred the plaintiffs' claims. (16) The court determined that the statute of limitations began to run when DeGiacomo gained sufficient knowledge about Edward and Sumner's actions to bring a claim against them for breach of their fiduciary duties. (17) On appeal by the trustees of the Ruth Ann and Michael trusts, the Supreme Judicial Court of Massachusetts concluded that the limitations period commenced when DeGiacomo began his successor trusteeship. (18)

Modern common law identifies the trust as a "fiduciary relationship with respect to property." (19) While holding legal title to the trust property, the trustee is bound by equitable fiduciary duties to act for the sole benefit of the beneficiary and is personally liable to the beneficiary for injury to the trust estate caused by the trustee's intentional breaches of these fiduciary duties. (20) one such duty is the duty to bring claims against any third party who causes harm to the trust property. (21) In the event a trustee fails to bring a claim against a third party, the beneficiary can bring suit against the third party on behalf of the trust and can also hold the trustee personally liable for his or her breach of fiduciary duty. (22)

A trustee may resign in accordance with the terms of the trust. (23) Upon the trustee's resignation, all express and implied powers vested in the original trustee will pass to the successor trustee; however, the original trustee is still liable for acts or omissions committed during his trusteeship, and continues to hold residual equitable fiduciary obligations to the beneficiary. (24) once the successor trustee accepts the trusteeship, he or she has a duty to the beneficiaries to bring suit to remedy any breach of trust committed during the predecessor trustee's tenure. (25) While the successor trustee is not liable for the acts of his or her predecessor, the beneficiaries have a cause of action against the successor trustee for breaching his or her own fiduciary duties. (26) Jurisdictions vary in their treatment of former trustees; some courts identify a former trustee as a third party with no residual duties to the beneficiaries, while other courts indicate that a former trustee will always have some fiduciary duties to the beneficiaries for the duration of the trust and therefore cannot be a third party. (27)

The equitable doctrine of laches and the statute of limitations are both the result of public policy favoring timely actions to remediate wrongs. (28) under common law, the statute of limitations will not bar the beneficiary from bringing claims against the trustee until the beneficiary has actual knowledge of the harm he or she sustained. (29) The actual knowledge requirement, as recognized in many jurisdictions, including Massachusetts in Lattuca v. Robsham, (30) protects the beneficiary's expectation that the trustee acts in his or her best interest by tolling the statute of limitations for equitable claims until the beneficiary has knowledge of the harm in question. (31) Section 237 of The Restatement of Trusts indicates that the statute of limitations also applies to legal claims between the trustee and third parties which can prevent the beneficiary from bringing suit against the third party. (32) In McPherson v. McPherson, (33) the Arkansas Supreme Court refused to preclude claims against former trustees under section 327, indicating that a fair reading of the section only precluded legal claims by beneficiaries against third parties. (34) In situations involving legal claims against third parties, the statute of limitations runs when the trustee has actual knowledge of the harm. (35)

In O 'Connor v. Redstone, the Supreme Judicial Court of Massachusetts considered whether a successor trustee's knowledge of breaches of fiduciary duty by a predecessor trustee is sufficient to commence running the statute of limitations. (36) The court initially recognized the actual knowledge doctrine in the context of a beneficiary directly pursuing an...